3 Objectives Define and describe accounting Explain the importance of accounting principals Provide detailed explanations about different types of financial statements or scorecards

4 Brief History of Bookkeeping Thousands of years ago, wealth & taxes were recorded. Based on principals set in text over 500 years ago. Double entry system ( debits & credits) first used by merchants in Venice, Italy around 1494 and is still used today! The five groups of accounts still used today: Assets, Liabilities, Income, Expense & Capital

5 Definition of Accounting Accounting is the art of recording, classifying & summarizing financial events. Accounting can be defined as providing information about business organizations to interested parties. All businesses need a system of planning & maintaining information about their financial affairs!

6 Why is Accounting Important? Accounting is the language of business, interpretation & communication of a company s operations & finances. Financial information allows entrepreneurs to make informed business decisions. We all work with & use accounting principals (ex. deciding how to spend paycheck). Whoever makes the decisions for the business needs to understand the basics and what each financial report means!

7 General Ledger A business uses a general ledger to organize all of it s accounting transactions. A moment to moment record of everything that happens. Today, most small businesses use a software package to keep track of their general ledger.

8 Double Entry vs. Single Entry Double Entry - Making a transaction to one side and then make a second entry to the other side of the general ledger, financial statement or scorecard. Helps to keep it balanced. Single Entry Associated with an automated accounting system. After entering the first entry, the computer program makes the other side. You still need to know what is going on behind the scenes.

13 Other Balance Sheets Terms Accounts Receivable Money that your customers owe to you. Other Current Assets Things you own that you ll use or convert to cash within 12 months. Fixed Assets Things your company owns that decrease in value over time (depreciate). Other Assets Things you won t convert to cash in the next twelve months or depreciate.

14 Other Balance Sheets Terms Cont. Accounts Payable Money you owe in the next twelve months to vendors. Other Current Liabilities Money you owe in the next twelve months such as sales tax. Long Term Liabilities Money you owe after the next Twelve months such as mortgage payments.

18 Income/Profit & Loss Terms Cost of Goods Sold (COGS) Cost of products and materials that you held in inventory then sold and other expenses related to sales such as commissions. Gross Margin/Profit Sales minus COGS, percentage of sales. It is important to business for it is money left over to pay for expenses of being in business. Business Expenses or Fixed Expenses Costs of being in business such as : salaries, insurance, rent, advertising, utilities and interest payment. They do not vary with the sales level. Depreciation The reduction of cost of your equipment over time. A non cash expense.

22 What is the Difference Between Cash & Accrual Accounting? Cash Basis: Revenues are reported on the income statement when received from customers Expenses are reported on the income statement when cash is paid Accrual Basis: Revenues are reported on the income statement when earned which often occurs before cash is received Expenses are reported on the income statement when they occur which is often in a period different from when they are paid Accrual basis of accounting provides a better picture of a company s financial position.

25 Chart of Accounts The Starting Point End result of bookkeeping & accounting is a set of financial statements but the starting point is the chart of accounts. List of all accounts you use to track money in your business. Tool for tracking your company s finances at a relatively high level. Helps you produce financial statements and prepare your business tax returns.

26 Chart of Accounts Index of Accounts in the General Ledger 1000 Assets 2000 Liabilities 3000 Equity 4000 Revenue 5000 Costs of Goods Sold (COGS) 6000 Expenses Accounts can be broken down in more detail using subaccounts.

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